May 12, 2011 / 8:37 AM / 8 years ago

Weak industry output adds to recovery concerns

LONDON (Reuters) - A disappointing performance by industry and a rise in the number of home repossessions dealt a blow to Britain’s recovery prospects on Thursday, and doused any hopes for an upgrade to first-quarter growth.

Official data showing industrial output in March failed to recover from a sharp drop in the previous month chimed with forecasts from the Bank of England on Wednesday that showed the recovery would be much slower than it thought three months ago.

Other figures on Thursday showed the number of homes repossessed by lenders between January and March rose for the first time in more than a year as public sector cutbacks and squeezed household budgets took their toll.

The pound hit a three-week low against the dollar and interest rate futures jumped as investors reassessed their expectations for monetary tightening from the Bank.

The central bank’s inflation forecasts had fuelled bets it would raise interest rates from their record low 0.5 percent towards the end of this year. But its growth outlook was based on the assumption that manufacturing continues to expand.

“March’s industrial production figures pour more cold water on hopes that the sector will be able to keep up its recent support for the overall economic recovery,” said Samuel Tombs of Capital Economics.

The Office for National Statistics said industrial output rose 0.3 in March after a 1.2 percent fall in February, less than half the gain forecast by economists, partly due to ongoing maintenance work in oil and gas fields.

That meant growth in the sector came in at just 0.2 percent in the first quarter of this year, compared with an estimate of 0.4 percent in a preliminary reading of GDP last month, showing that the overall economy grew only by a tepid 0.5 percent.

The ONS said the negative impact on the GDP figures would be minimal. Nonetheless, the figures indicate that manufacturing activity is slowing from its heady pace last year and highlights the sluggish pace of Britain’s economic recovery.

Manufacturing output rose by just 0.2 percent in March also a notch less than forecast.

BRIGHT SPOT FADING?

The government and Bank are relying on strong export-driven growth in manufacturing to fill the gap created by cuts in government spending and likely belt-tightening by consumers.

And so far, Britain’s manufacturing sector has been one of the few bright spots in the economy, benefiting from a 25 percent fall in the pound since 2007 and robust demand from other countries.

However, recent surveys have indicated the sector may now be running out of steam.

“There is significant concern that manufacturers will find life increasingly challenging over the coming months as stock rebuilding wanes and tighter fiscal policy weighs down on domestic demand,” said Howard Archer, economist at IHS Global Insight.

Figures from the Council of Mortgage Lenders showed the squeeze on incomes is already having an impact on households, with home repossessions between January and March up 15 percent on the quarter. Separate data showed a 3 percent quarterly rise in court orders to repossess homes.

Experts warned that government cutbacks meant some schemes to help keep people in their homes had been scrapped, so repossessions were likely to rise further, putting even more downward pressure on an already-weak housing market.

That spells bad news for retailers, who have been complaining about challenging conditions on the High Street, and are bracing for tougher times ahead.

Electricals goods retailer Dixons DXNS.L became the latest to issue a warning on Thursday, saying it expected profits in its 2011/12 financial year to be flat at best due to weak consumer spending.

(Editing by Toby Chopra and Susan Fenton)

Additional reporting by Christina Fincher and Peter Griffiths

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